On Swiss bonds and World War II
with Marcel Kucher Swiss Journal of Economics and Statistics 1998 paper, abstract: '"Historical events are reflected in asset prices. In this paper we therefore analyze the prices of Swiss government bonds traded during WWII. The econometric analysis reveals that some events that are generally considered crucial for the military threat Switzerland faced, are clearly reflected in government bond prices. This holds, in particular, for events that occured before the official outbreak of the war. The most prominent examples are the Nazi takeover in Januray 1933 or the introduction of the draft for military service in March 1935. On the other hand, some events to which historians attach great attention are not reflected in bond prices at all: The most prominent example is the German capitulation in 1945. The analysis of financial markets is certainly no substitute to the traditional inquiries undertaken by historians. But it is a challenging complementaiy method to evaluate particular sentiments existing at a given moment of time." 'Empirica 1999 paper, did not cite earlier work, abstract: 'Historical events are reflected in asset prices. Looking at Austrian government bond prices traded on the Swiss stock exchange during WWII provides therefore a useful way of interpreting the importance the thousands of people directly and indirectly engaged in stock markets attributed to various war events. An econometric analysis of the relationship between government bond values and events in Austrian history reveals that some generally considered crucial events connected with WWII are clearly reflected in Austrian government bond prices. 'Journal of Economic History 2000 paper, did not cite earlier work, abstract: '"Historical events are reflected in asset prices. We analyze movements in the price of bonds issued by five European governments and traded on the Swiss bourse between 1928 and 1948, with special attention to the war years. Some war events that are generally considered crucial are clearly reflected in government bond prices. This holds, in particular, for the official outbreak of the war and changes in national sovereignty. But other events to which historians attach great importance are notreflected in bond prices, most prominently Germany’s capitulation in 1945." 'Economics Letters 2000 paper, did not cite earlier work, abstract: '"Historical events are reflected in asset prices. We analyze government bond prices of five European countries traded on the Swiss bourse during WWII. Apart from the official outbreak of WWII, loss and gain of national sovereignty influenced the capital market." 'Economica 2001 paper, did not cite earlier work, abstract: '"Historical events are reflected in asset prices. Based on a unique data-set, we analyse government bond prices of Germany and Austria traded on the Swiss bourse during the Second World War. Some war events generally considered crucial are clearly reflected in governmenbt ond prices;t his holds, in particularf,o r the officialo utbreako f the war and the loss and gain of national sovereignty. Other events to which historians attach great importance are not reflected in bond prices, most prominently Germany's capitulation in 1945. The analysis of financial markets provides a fruitful method for evaluating the importance contemporaries attached to historical events." Comparison Journal of Economic History 2000 / Economics Letters 2000 p. 468 JEH This study looks at changes in the value of financial assets as reflections of historical events. More specifically, the historical events considered here bracket World War 11, beginning with Hitler’s appointment as chancellor on 30 January 1933 and ending with the two Marshall Plan Conferences in September 1947. We analyze changes in the price of sovereign bonds denominated in Swiss francs and traded on the Swiss bourse during this period. While all the belligerents interfered heavily in-or even closed their financial exchanges, the Swiss government, for reasons of neutrality, refrained from doing so (except for the two months following the German attack against the West in May and June 1940, when the Swiss bourse did close). Five issuers dominated the Swiss government-bond market: Germany, the main aggressor in World War, Austria, a country integrated into the Third Reich well before the outbreak of the war; France, Germany’s traditional enemy in the West; and Belgium and Switzerland, two neutral countries, the first of which was drawn into the war, while the latter was spared direct involvement. There was only very limited trading in the bonds of other governments. p 187 EL This paper econometrically analyzes changes in financial values as reflections of events in and before World War II. The change in the values of national government bonds issued in Swiss Francs and traded on the Swiss bourse is examined for the period 1933–1946. The Swiss government, for reasons of neutrality, refrained from interfering in the bond market (except for the 2 months following the German attack against the West in May and June 1940, when the Swiss bourse was closed). The government bond market in Switzerland consisted mainly of five countries: Germany, the main aggressor; Austria, a country integrated into the Third Reich; France, the major and traditional enemy of Germany in theWest; Belgium and Switzerland, two neutral countries, the first of which was drawn into the war, while the latter was spared direct involvement. p. 470 JEH According to efficient-market theory, capital markets offer three particular advantages over other data sources. First, provided they are correctly recorded (which is probable since bourses are public or quasi-public), securities prices reflect the situation obtaining at the given point in time. The future is not known, nor can it be incorporated into these data retroactively. What can be registered are the decision makers’ subjective expectations about the future, which is a wholly different matter. p 187/188 EL The use of capital market data has three particular advantages over other sources of data: 1) They solely reflect the situation obtaining at a given point of time. Future developments and insights cannot enter the data at a later date. Capital market data capture the expectations about how a particular war event changes the likelihood of a country servicing and repaying its international debt. p 470 JEH Second, investors are likely to evaluate carefully the prevailing situation, as well as any likely hture developments, because errors directly affect their pocketbooks. Even a Nazi sympathizer had to weigh the probability of default on, or repudiation of, German government bonds should Germany lose the war. Failure to do so incurred a great risk of capital loss. This too distinguishes capital markets fiom other data sources, particularly surveys and questionnaires. p 188 EL 2) Actors on financial markets have strong incentives to carefully evaluate the prevailing situation, as well as any likely future developments, because errors directly affect them in monetary terms. This distinguishes capital market data from data such as surveys or questionnaires. p 470 JEH A final advantage is that financial markets usually exhibit a high predictive power, due to so-called marginal traders. This type of trader carefully assesses the relevant information and acts on a relatively unbiased basis. In the extreme case, one such trader can drive the market price to the underlying equilibrium p 188 EL Financial markets usually exhibit a high predictive power, due to so-called marginal traders. p 471/472 JEH The foreign governments that borrowed most in the Swiss capital market were France and Germany, followed by Belgium and Austria. The value at emission of Germany’s sovereign debt was roughly SFr 3 billion, France’s SFr 3.6 billion, Belgium and Austria’s SFr 1 billion and SFr 590 million, respectively (all 1999 values) p 188 EL The countries that borrowed the most on the Swiss capital market during the time-span between the two world wars were France and Germany, followed by Belgium and Austria. Converted into today’s Swiss Francs, the value at emission of the 31 German government bonds equalled roughly 3 billion Swiss Francs. France’s government debt in Switzerland equalled 3.6 billion Swiss Francs, and Belgium and Austria borrowed one billion and 590 million Swiss Francs respectively. p 474 JEH In order to find all possible dates for structural breaks, we apply a fourstep procedure based on the work of Anindya Banerjee, Robin Lumsdaine, James Stock, and Pierre Perron. p 189 EL To identify all possible dates for structural breaks, a four-step procedure based on Banerjee et al. (1992) and Perron (1989) is applied. p 474 JEH As can be seen in Figure 1, there is a strong downturn in the index of all government bonds traded in Switzerland from late 1933 up to the outbreak of World War II. During the war, the index remained relatively stable at around 40 percent of par. One interesting feature is the peak in mid-1944, just about when Allied forces invaded Normandy. p 189 EL Fig. 1 shows a strong downturn in the market index before the outbreak of WWII. During the war, the index remained stable at around 40 percent of par. One interesting feature is the peak in 1944, just about the time when the allied forces invaded Normandy. References: Frey, Bruno S., and Marcel Kucher (2000), "History as Reflected in Capital Markets: The Case of World War II", The Journal of Economic History'', 60(2), 468-96. DOI: 10.1017/S002205070000022X Frey, Bruno S., and Marcel Kucher (2000), "World War II as reflected on capital markets", Economics Letters, 69(2), 187–91. DOI: 10.1016/S0165-1765(00)00269-X Frey, Bruno S., and Marcel Kucher (2001), "Wars and Markets: How Bond Values Reflect the Second World War", Economica, 68(271), 317–33. DOI: 10.1111/1468-0335.00249 Kucher, Marcel, Bruno S. Frey (1998),'' "Krieg und Finanzmarkt. Eine ökonomische Analyse der Bedrohungslage der Schweiz im 2. Weltkrieg",'' ''Swiss Journal of Economics and Statistics, '''1998-IV-1, 471-497. Kucher, Marcel, Bruno S. Frey (1999), "Asset Prices and History: The Case of Austria", ''Empirica, 26(1), 11-20.